ResMed Inc. — Form 10-Q Summary
Reporting period: The filing is for the quarter ended March 31, 2018, ResMed’s fiscal 2018 third quarter, with year-to-date results for the nine months ended March 31, 2018. The request metadata says “2017 Q3,” but that does not match the filing. Amounts below are in U.S. dollars; financial statements are unaudited.
Business context
ResMed develops, manufactures and sells devices and cloud-based software for sleep-disordered breathing and other respiratory and chronic conditions. Its offering includes therapy devices, masks and accessories, and software-as-a-service solutions, including Brightree.
Key financial metrics
| Metric | Three months ended March 31, 2018 | Prior-year quarter | Nine months ended March 31, 2018 | Prior-year nine months |
|---|---|---|---|---|
| Revenue | $591.6 million | $514.2 million | $1,716.6 million | $1,510.1 million |
| Gross profit / margin | $344.3 million / 58.2% | $299.7 million / 58.3% | $999.7 million / 58.2% | $878.0 million / 58.1% |
| Operating income | $136.4 million | $107.4 million | $394.9 million | $298.4 million |
| Net income | $110.1 million | $87.8 million | $205.8 million | $240.7 million |
| Diluted EPS | $0.76 | $0.62 | $1.43 | $1.69 |
| Operating cash flow | Not separately provided | Not separately provided | $375.6 million | $273.7 million |
Quarterly revenue rose 15% (10% on a constant-currency basis); diluted EPS rose 23%. For the nine-month period, revenue rose 14% (10% constant currency), while net income fell 14%, principally reflecting a $132.2 million provisional tax charge related to U.S. tax legislation. Quarterly operating margin was approximately 23.1%, compared with 20.9% a year earlier; nine-month operating margin was approximately 23.0%, compared with 19.8%.
At March 31, 2018, cash and equivalents were $704.3 million, total debt was $810.0 million, and net debt was $105.7 million. Working capital was $1,142.9 million. Nine-month capital expenditures were $45.0 million; dividends paid were $149.5 million and share repurchases were $27.9 million. Cash declined by $117.7 million during the nine months, largely reflecting debt repayment and shareholder returns.
Changes versus comparable periods
- Quarterly revenue growth was driven by higher device, mask and accessory unit sales, partly offset by lower average selling prices. International exchange movements added approximately $23.6 million to quarterly revenue; Brightree quarterly revenue was $39.9 million, up 14% year over year.
- Devices revenue increased 17% and masks and accessories revenue increased 13% in the quarter; excluding currency effects, those increases were 11% and 9%, respectively. Europe, Asia and other markets grew faster than the Americas.
- Quarterly gross margin was nearly flat year over year: selling-price declines offset manufacturing and procurement efficiencies. Nine-month gross margin edged up to 58.2%, partly benefiting from the absence of a prior-year $5.0 million Astral battery safety notification expense.
- Nine-month cash from operations increased to $375.6 million from $273.7 million. Management attributed the improvement primarily to underlying earnings when excluding the U.S. tax-law charge.
- Debt declined by $270.0 million net from June 30, 2017. Cash fell from $821.9 million to $704.3 million.
Outlook, commentary, risks and unusual items
- Outlook: The filing provides no numerical revenue or earnings guidance. Management said it expects to meet liquidity and long-term debt needs through cash on hand, operating cash generation, and new and existing debt facilities.
- Restructuring: A global workforce review generated $10.9 million of expense in the quarter and nine-month period. ResMed expected approximately $7.0 million of additional restructuring expense in the quarter ending June 30, 2018, mainly severance and site-closure costs.
- Tax: The nine-month effective tax rate was 45.9%, versus 19.0% in the prior-year period, including the provisional $132.2 million U.S. tax-law charge. Management expected to finalize its accounting for that charge before December 22, 2018.
- Australian tax dispute: The ATO asserted $151.7 million of additional tax and $38.4 million of accrued interest for tax years 2009–2013. ResMed disputes the assessments and says it is more likely than not to prevail. It paid $75.9 million in April 2018 under an arrangement; the remaining amounts, and potentially penalties, would be payable if it loses. The March 31 balance sheet recorded the $75.9 million as a tax liability offset by a receivable.
- Debt refinancing after quarter-end: On April 17, 2018, ResMed entered into an $800 million revolving facility, with an uncommitted $300 million increase option, and a $200 million term facility. Both mature April 17, 2023; the term facility amortizes semiannually. These replaced/refinanced the prior credit arrangements.
- Other risks: ResMed disclosed patent disputes with Fisher & Paykel Healthcare in several jurisdictions, including a UK ruling invalidating three ResMed patents in November 2017. It also continued cooperating with U.S. government administrative subpoenas concerning industry practices and customer arrangements. Outcomes and potential financial effects are uncertain.
- Foreign exchange and investments: Foreign-currency losses and cost-method investment impairments contributed to nine-month other expense; investment impairment was $3.6 million versus $0.6 million in the prior-year period. The company uses currency derivatives for economic risk management, not speculation.
- Accounting changes: ResMed expected to record an approximately $60 million reduction in prepaid taxes and a corresponding retained-earnings adjustment upon adoption of the intra-entity tax-transfer standard on July 1, 2018. Management was still assessing other upcoming accounting standards.
Important facts for investors to verify
- Confirm the reporting-period mismatch: this filing covers fiscal Q3 2018, not 2017 Q3.
- Track the final U.S. tax-law accounting and any resulting changes to tax expense, cash taxes, or deferred tax balances.
- Monitor the ATO dispute, including the potential recovery of the $75.9 million payment and exposure to additional tax, interest and penalties.
- Assess whether device and accessory unit growth can continue to offset lower average selling prices, and whether constant-currency growth persists.
- Review execution and costs of the workforce restructuring, including the anticipated additional $7.0 million charge.
- Check the terms, borrowing costs and covenant compliance under the April 2018 refinancing, and follow developments in the patent disputes and government inquiries.